Lecturer Week 3 Dr. Syed Faiz Ahmed Fundamentals of Engineering Economics

Transcription

1 Lecturer Week 3 Dr. Syed Faiz Ahmed Fundamentals of Engineering Economics 1

2 Engineering Economic Decisions Rational Decision- making Process The Engineer s Role in Business Types of Strategic Engineering Economic Decisions Fundamental Principles in Engineering Economics Bose Corporation 2

3 Engineering Economics Overview Rational Decision-Making Process Economic Decisions Predicting Future Role of Engineers in Business Large-scale engineering projects Types of strategic engineering economic decisions Fundamental Principles in Engineering Economics 3

4 Flow Chart 1. Recognize a decision problem 2. Define the goals or objectives 3. Collect all the relevant information 4. Identify a set of feasible decision alternatives 5. Select the decision criterion to use 6. Select the best alternative 4

5 1. Recognize a decision problem 2. Define the goals or objectives 3. Collect all the relevant information 4. Identify a set of feasible decision alternatives 5. Select the decision criterion to use 6. Select the best alternative Need a car Want mechanical security Gather technical as well as financial data Choose between Saturn and Honda Want minimum total cash outlay Select Honda 5

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7 Manufacturing Profit Planning Investment Marketing 7

8 Getting an Idea: (Necessity is the mother of invention) What are the market demands What are necessities. How we can make people life more comfortable. Setting Design Goals & Objectives: How to fulfill market demands Keep things simple Location Product shape easy Or more attractive Keep product cost low. 8

9 Evaluate Design Alternatives: How to comply Goals & Objective Selection of method & materials Gauging Product Cost: Set optimal price Do Survey Bulk quantity production calculation Environmental Issues Green Energy Pollution Free Recycle / reusability 9

10 Engineering decisions Perfect Design Long life Very High Quality Economics Decisions Cost effective high profit Engineering Economics Decisions. Low cost high profit Good looking but cheap No need to design for very long time. 10

11 Estimating a Required investment Forecasting a product demand Estimating a selling price Estimating a manufacturing cost Estimating a product life 11

12 Create & Design Engineering Projects Analyze Production Methods Engineering Safety Environmental Impacts Market Assessment Evaluate Expected Profitability Timing of Cash Flows Degree of Financial Risk Evaluate Impact on Financial Statements Firm s Market Value Stock Price 12

13 Evaluating past performance Evaluating and predicting future events Accounting Engineering Economy Past Present Future 13

14 The factors of time and uncertainty are the defining aspects of any engineering economic decisions 14

15 Requires a large sum of investment Takes a long time to see the financial outcomes Difficult to predict the revenue and cost streams (Remember Cash flow discussed earlier) 15

16 Service Improvement Equipment and Process Selection Equipment Replacement New Product and Product Expansion Cost Reduction 16

17 Service Improvement How many more jeans would Levi need to sell to justify the cost of additional robotic tailors? 17

18 How do you choose between the Plastic SMC and the Steel sheet stock for an auto body panel? The choice of material will dictate the manufacturing process for an automotive body panel as well as manufacturing costs. 18

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20 Now is the time to replace the old machine? If not, when is the right time to replace the old equipment? 20

21 Shall we build or acquire a new facility to meet the increased demand? Is it worth spending money to market a new product? 21

22 Should a company buy equipment to perform an operation now done manually? Should spend money now in order to save more money later? 22

23 Types of Strategic Engineering Economic Decisions in Service Sector Commercial / Public Transportation Logistics and Distribution Healthcare Industry Electronic Markets (TV, Radio Newspapers) Financial Engineering (loans and etc ) Retails (discounts / promossions) Hospitality and Entertainment Customer Service and Maintenance 23

24 Manufacturing (14%) Service sector (80%) Healthcare (14%) Agriculture (2%) 24

25 Example - Healthcare Delivery Which plan is more economically viable? Traditional Plan: Patients visit each service provider. New Plan: Each service provider visits patients : patient : service provider 25

26 Principle 1: A nearby dollar is worth more than a distant dollar Principle 2: All it counts is the differences among alternatives Principle 3: Marginal revenue must exceed marginal cost Principle 4: Additional risk is not taken without the expected additional return 26

27 Today 6-month later 27

28 Option Monthly Fuel Cost Monthly Maintena nce Cash outlay at signing Monthly payment Salvage Value at end of year 3 Buy $960 $550 $6,500 $350 $9,000 Lease $960 $550 $2,400 $550 0 Irrelevant items in decision making 28

29 Marginal cost Manufacturing cost 1 unit Sales revenue 1 unit Marginal revenue 29

30 Investment Class Potential Risk Expected Return Savings account (cash) Low/None 1.5% Bond (debt) Moderate 4.8% Stock (equity) High 11.5% 30

31 The term engineering economic decision refers to all investment decisions relating to engineering projects. The five main types of engineering economic decisions are (1) service improvement, (2) equipment and process selection, (3) equipment replacement, (4) new product and product expansion, and (5) cost reduction. The factors of time and uncertainty are the defining aspects of any investment project. 31